"...interest rates are going to start really climbing, what investments do we avoid and what do we do to protect ourselves? What does a hunker down strategy look like?"

a) I am in R.E. Can't really get out. I am working on improving the quality of what I own and the intrinsic value for some future sale, as nominal values bounce and fall. Retail real estate for financed homeowners will go down proportionally with interest rates going up, because affordability is based on the monthly payment. Still there are some amazing buys out there now and in the next year in terms of cash buying distressed property. I see a fairly stable market at least here (maybe not where you are) right now, compared to the future(?), to sell quality homeowner property at some fair price. One theoretically could sell a home at today's retail, and buy at an amazing value on a distressed property to hunker down on if so inclined.

b) In the total real 'meltdown' scenario, a good friend tells me buy silver dimes instead of bars of gold or gold on paper. You might be able to buy a loaf of bread or an iodine sample with silver dimes. Show real gold and they might just kill you. Can't make change or conduct basic transactions with bullion.

c) Paper investments, I recommend a mutual fund like T Rowe Price Spectrum Income https://www3.troweprice.com/fb2/fbkweb/performance.do?ticker=RPSIX which is I think one of their more defensive funds. (I previously mentioned knowing someone managing large funds but cannot recommend their own or give out any information.) You are brave to still research companies and plan in and out strategies in a game run by pros. Even buy and hold of great companies is not foolproof. You can get in and out of a fund like the above any market day with no transaction fee. The costs (0.72%) are in the fund, not something you are charged at the beginning or end. They provide the professional management and the in and out strategies within the investment. The Spectrum series has other funds with other mixes. (I used to buy TRP's more aggressive growth stock funds - offensive strategies only.) Last time the market really tanked, the mgr of this fund was on the cover of Barrons for good performance. Regarding the future, I have no idea and certainly no inside information.

We have now gotten to the point — as I noted yesterday — where if national defense, interstate highways, national parks, homeland security, and all other discretionary programs somehow became absolutely free, we’d still have a budget deficit. The White House Office of Management and Budget projects that in the current fiscal year (2011), mandatory spending alone will exceed all federal receipts. So even if we didn’t spend a single cent on discretionary programs, we still wouldn’t be able to balance our budget this year — let alone pay off any of the $14 trillion in debt that we have already accumulated.

At the moment it appears "flight to safety" dynamics are driving rates down somewhat, but in the longer run IMHO rates will rise, which will cause rates to rise further due to the rate rise worsening our debt and deficit contradictions. I see a vicious cycle in the making. I've read pieces saying that the Fed will keep QE 2 going (will it become QE 3? 4? 6? 9?) at least through the end of the year, but at some point it must end , , , and then the chickens will come home to roost.

Of course that ignores events in the mid-east, or less buying by the Chinese (now running a trade deficit?!) and the Japanese, which may well dramatically accelerate what I see as being already in the pipeline.

I've read that the losses (stock market? economic ? ) in Japan are running $600-800 Billion. If Japan sold that much in Treasuries, it would go a long way to reversing QE ? Or the other way around ? The Fed would take the "phantom" QE "bank reserve" money and give "real" money to the Japanese... and investors would buy some of the bills.. ?

Odd that Japan index ETFs are selling for 5% over NAV in expectation of a quick recovery.

Equity Bull or Currency Bear?March 25, 2011 by Jeremy Jones Is it an equity bull market or a currency bear market? In U.S. dollars, the S&P 500 is up an impressive 25% since August 31, 2010, but in terms of Swiss francs and gold, the S&P 500 is up only 12% and 9% respectively. Over half of the stock market rally since August can be attributed to dollar debasement.

The VIX – a (tradable) measure of equity price volatility – tends to spike when the US equity market falls. As a result, short-sellers (who see Black Swans everywhere) like it. It has also become a popular tool for equity investors who want buy some insurance on their long positions.

In early March, Japan’s triple whammy of earthquake, tsunami, and nuclear troubles, along with ongoing political uprisings across North Africa and the Middle East caused the VIX to spike. Short-sellers were in heaven. They anticipated a significant correction, or maybe even the next leg down in what they still think is a secular bear market.

According to the Wall Street Journal (here), the VIX peaked at 31.28 on March 16 – well below the Mt. Everest-like highs of about 80 that we saw during the Panic of 2008 – but still the highest since mid-2010. Then it collapsed, falling 45% in seven trading days – its fastest seven-day swoon on record. It now stands near 18.

The shorts have been shellacked like this many times in the past two years. The reasons are simple to understand. The world is not about to come to an end. It is true that some parts of the economy, especially housing and employment, are lagging, but the rest of it is doing just fine, thank you.

And Friday’s numbers on corporate profits support the optimistic outlook. Overall profits hit a record high at the end of 2010, tracing out a perfect V-shaped recovery from the Panic of 2008 (see chart here). Profits were up at a 10% annualized rate in Q4 and up 18% from a year before.

We use a capitalized profits model to value stocks. We start by taking overall corporate profits and dividing them by the 10-year Treasury yield. Then we compare the result to the actual market in each quarter for the past 60 years and use it to find an average fair value for stocks today.

If we assume profits increase another 2% in Q1 and use a 10-year Treasury yield of 3.5%, the model gives us a fair value estimate for the Dow of 22,800. We think this is too high because we believe the Fed is holding interest rates artificially low. So, in our official model we use a 10-year T-note yield of 5%. This generates a “fair value” estimate of 16,000 on the Dow and 1715 for the S&P 500.

In other words, getting to fair value would require the US equity markets to rise 31% from Friday’s close. And that assumes no further gain in profits after Q1. We think these results are pretty robust. If we stress test for rising rates, the 10-year Treasury yield would need to rise to 6.5%, with no intervening increase in profits for the model to show equities are at fair value already.

We stand by the forecast we made at the start of the year that the Dow should hit 14,500 by year-end 2011, while the S&P 500 strikes 1575. In other words, short the shorts – equities are still cheap. And watch out for the VIX, too.

You may have heard that Americans lost a lot of wealth in the first part of the great credit unwind. How much? According to a new survey from the Federal Reserve Board, Americans lost as much as 23 percent of their wealth between 2007 and 2009.

That may sound extreme, but it is close to the aggregate decline I reported on, using Fed Flow of Funds data, in 2009. At that time, it looked like somewhere between $8 trillion and $14 trillion in household net worth was lost from a peak of either $58.6 trillion or $64.4 trillion. That's a decline of either 14 percent or 22 percent.

The Fed study "Surveying the Aftermath of the Storm: Changes in Family Finances from 2007 to 2009" [pdf] suggests that higher number was close to the mark: "The mean (median) fell from $595,000 ($125,000) in 2007 to $481,000 ($96,000) in 2009." The study is a re-interview of people who took part in a 2007 Survey of Consumer Finances, and its findings confirm at a more granular level the cumulative loss of wealth reflected in the Fed’s quarterly statistics. More than 60 percent of families lost wealth over the period; about a quarter gained wealth to small degrees.

You may find the lengthy explanations of methodology less riveting than I do, but a few points jump out:

* This recession hasn't been good for economic mobility. Although there's been plenty of movement – mostly downward – in net worth, there’s been very little change in families’ positions in wealth rankings. “[T]he most common single outcome was relatively small or no change in a family’s relative position in the distribution.” Even relative upward mobility can mean little when everybody’s getting burned. “For example, 18 percent of families whose rank in the wealth distribution improved by three to ten percentile points in fact had a decline in their wealth.”

* …But it might be good for marital stability. Households without a spouse were more likely to get hitched during the two-year period than married/partnered households were likely to split up.

* When will someone think of the rich? Relatively speaking, poor households did better over the period than wealthier households: “ncome increased for families with income below the 2007 median and income fell for families with income near and above the 2007 median;” “[R]egions and age groups with the lowest median incomes in 2007 tended to experience increases in median income as well as positive dollar and percent changes;” “Families that moved up the wealth distribution by three or more percentiles tended to have lower wealth than other families;” and “There was greater variation in wealth changes for lower-income families.” (There may be some skewing because changes in wealth seem more substantial the closer you get to zero.) Again, this comports with anecdotal evidence: The difference between the Great Recession and the usual recessions is that this time even rich people got hit.

* Debt = poverty. “Across the wealth-change categories, families that moved down the wealth distribution from 2007 to 2009 by more than three percentile points tended to become more highly leveraged over this period.”

* Real estate is still the word of our undoing. “The largest percentage declines in the median values of nonfinancial assets in the SCF panel were for vehicles, primary residences and non-residential real estate.” Not surprisingly then, “losses tended to be greatest for families living in the west, a reflection in large part, of the relatively greater declines in real estate prices in that region.” Increases in real estate ownership were more than offset by increases in the share of mortgage debt. Although the decline in the equity portion Americans own of their homes is a catastrophe decades in the making, the recession accelerated this trend.

* Most of the decline came from loss of asset values rather than willful changes in the asset mix. “[T]he majority of families passively accepted changes in portfolio shares driven by changes in asset prices.” Hand up over here! In fact, I’m not even sure how you can make big changes to your mix of holdings when everything’s losing money. How can you sell when nobody’s willing to buy?

* Unemployment matters less than they want you to think. “In general, the relationship between unemployment spells and shifts of families within the wealth distribution appears weak.” Again, you read it here first.

* ...And debt matters more than they want you to think. “Median total debt increased from $70,300 to $75,600.” The ratio of total debt to assets increased in part because the assets lost value rather than conscious decisions to take on more debt. And to the extent that people did reduce debt, brute-force deleveraging doesn’t seem to have made much difference: People who were heavily leveraged in 2007 but moved up within the wealth distribution “might also include families whose principal residence had a mortgage that exceeded its value in 2007 and who had lost that home by 2009; however, the data show that this situation is a negligible element in the observed outcomes.”

* Saving is hip again. “Most families in each of the relative wealth change categories reported greater desired precautionary savings in 2009 than they had in 2007.” Certificates of deposit and retirement accounts made up a bigger portion of the asset mix in 2009, which is especially impressive considering that interest rates for consumer accounts are close to zero or negative with inflation. Of the whole asset mix surveyed, only bonds and cash-value life insurance appreciated.

* …And that’s bad news for stimulus believers. While the Fed by its nature discourages savings and both the Bush and Obama Administrations sought to spur the economy by getting people to spend stupidly, it looks like the “wealth effect” is moving in the other direction – toward fiscal caution and away from drunken sailorism: “[T]he proportion agreeing that they would spend more if their assets rose is markedly lower than the fraction agreeing they would spend less if their assets declined in value. This outcome suggests that spending responses to wealth changes may be less symmetrical than has been apparent in aggregate data.” Needless to say, the Fed sees this prudence as bad news: “The data show signs that families’ behavior may act in some ways as a brake on reviving the economy in the short run.” As recently as last Christmas, Keynesians were still hoping for a return to spending, but that didn’t really happen.

In fact, the important question is what has happened to Americans’ wealth since 2009. Real estate has obviously continued to decline, and unemployment is higher than it was at the beginning of 2009. Stock market investments have been up and down, and will be down again. You could make the case that household net worth has been essentially flat since hitting rock bottom in the beginning of 2009. We’re still worth a lot less than we were in 2007, and thanks to the Fed’s two rounds of quantitative easing, our dollars are worth less too.

So basically the only good news here is that Americans remain tough and optimistic people: “In all wealth-change groups, most families found at least something positive in their experience, and the most common response was an answer that indicated a recognition that the workers in the family had managed to keep or get a job or that their income had somehow otherwise been maintained at an adequate level.”

The Roth IRA is something close to motherhood, baseball, and apple pie among America's middle class. Thus it's a rather novel sensation to see someone named Gerald Scorse, who seems to be a left-leaning tax activist, takes to the pages of the LA Times to excoriate them.

In a Roth, taxes are treated the other way around. There's no tax break on contributions. But from that point on, taxes simply vanish. As long as the account is at least 5 years old, there is no tax on any withdrawals made after age 59 1/2. There's no requirement that you make a minimum withdrawal -- after age 70 1/2, or ever.

All of which makes Roths a perfect "fiscal Frankenstein." In return for little more than ordinary upfront taxes, Congress waived untold billions in future Treasury receipts. Then, too, Roths could be a drag on the U.S. economy. Since no withdrawals are required, assets can lie idle indefinitely.

For Roth holders, the accounts become a permanent, federally sanctioned tax shelter. For America, they're a bit like toxic instruments on the nation's books. Worse, Congress has them on steroids, and President Obama wants to up the dosage.

The limit on annual Roth contributions has risen from $2,000 to $5,000. Persons over 50 can add another $1,000 to "catch up." That's a $6,000 per-year maximum, $12,000 for a married couple -- triple the original limits.

While this argument is rather novel, I doubt it will be unique. I'm less excited about Roth IRAs than most people who write about personal finance, and that's because over the years, I expect we're going to see a lot more op-eds like Scorse's. When I look at the budget problems we face, I'm skeptical that Congress is going to live up to its promise to keep its hands off that money. At the very least, I'd bet that high earners are going to see some sort of surtax on their Roth withdrawals.

Of course, I think this is true of non-Roth retirement savings as well. Ultimately, Congress is going to be faced with penalizing people who didn't save adequately for retirement by cutting their benefits, or penalizing people who did save, by raising taxes on their savings. For a lot of reasons, I expect them to err on the side of penalizing savings. This may have some very ill effects on capital formation in the US--but by the time they're making this decision, everything they do is going to have some very ill effects on something.

So why, despite all this, do I recommend higher savings? Why not consume now and force Congress to subsidize a modest existence later?

In part, I'm afraid, it's just my bourgeois ancestry speaking: decent people do not deliberately put themselves in a position where others are forced to support them--no, not even if lots of other people are doing it. But also because it's important to be financially comfortable in retirement, if you can swing it--and while Congress may penalize savers, I doubt it will actually make them worse off, on average, than people who didn't save.

"To hell with that!" say some of my commenters. "I want to enjoy my money now, when I'm young! Who cares if my old age is miserable--being old is miserable anyway!"

This sounds to me rather like the people I knew in college who didn't bother about getting themselves a career, because being 35 sucks anyway. When last heard from, several of them were using their Ivy League degrees to perform modestly remunerated administrative and clerical work. It is true that in many ways 38 is not quite as much fun as 18, starting with the fact that 18, I could raise both arms all the way over my head, and my lower back didn't bother me on long car trips. But it's still surprisingly enjoyable--especially if you have an interesting job that provides some income. While it's true that the thought of myself at 68 is still kind of horrifying, I assume that it will be considerably less horrifying if I can spend the occasional month traveling around Europe.

So I don't advise not saving. But I've started thinking about saving in ways that Uncle Sam won't be tempted to touch--like paying off your house early, maybe buying a vacation home (for cash) if you know where you're likely to want to spend a lot of time, and doing the kind of renovations that save you money in the long run--better insulation, higher-end energy-efficient appliances, etc. Paying now to lower your monthly costs later may have a better after-tax return than that "tax free" account.

One thing about a ROTH that is never stated is very important -- even if you think an IRA and a ROTH will be a wash for your tax bracket in retirement, there is another savings. Withdrawals from a ROTH do not count as part of the normally non-taxable income which is added to your normally taxable income to figure out how much tax you pay on your Social Security. That makes a ROTH conversion worthwhile even if your tax bracket remains the same. And a reason to always fund a ROTH instead of an IRA.

What are lucid analysts saying about increases in interest rates and inflation? And the chance of unexpected inflation? Should bond holders pre-emptively shorten their duration, or is everything priced in to the market already? Its important since the NAV of bond funds have often risen in the last couple of years, so swapping will incur some capital gains taxes.

Grannis and Wesbury have similar perspectives (both are supply siders btw). David Gordon, Scott Grannis and I are part of an email group and David is a high level market player with the pay-to-enter blog www.investmentpoetry.com to which I subscribe. David, who has quite a number of remarkably prescient market calls into an excellent stock picking and timing record, thinks we are about to have a sharp downturn, and that there will be a big downturn sometime in 2011-- currently he suspects it will be around the middle of the year but reserves the right to evolve his views as time goes by.

I brought this thread to David's attention and he is kind enough to share the following:

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The stock market continues the price correction that began 2-4 May, worsened somewhat on Friday after the disappointing labor statistics released pre-opening. The S&P 500 E-min Futures/ES, now 1298, could drop to the 1285-1266 range over the course of this week.

And yet, and yet… empirical data sources – such as major sentiment surveys, put/call ratios, and liquidity measures – remain and continue to suggest that the market is closer to the end of a correction than the beginning (of one). With sentiment data in a relatively supportive position, I would continue to buy relatively strong positions and stocks that remain in respective wave-4s in anticipation of a climactic low over the next few sessions to week. iow, the market’s decline of the past 4-6 weeks, seemingly terrible on its surface, in fact nears its end on a price and time basis — and increasingly manifests as a positive pattern and setup, short and intermediate term. Frustrating short term, I am sure, but even a cursory glance would reveal the increasing abundance of long side opportunities.

The SEC just might bring civil fraudcharges<http://online.wsj.com/article/SB10001424052702303499204576389973019552548.html>againstratings agencies for their role in the financial crisis. Regulators arefocusing on whether S&P and Moody's failed to adequately rate the subprimemortgages that underpinned mortgage-bond deals.David

The SEC just might bring civil fraudcharges<http://online.wsj.com/article/SB10001424052702303499204576389973019552548.html>againstratings agencies for their role in the financial crisis. Regulators arefocusing on whether S&P and Moody's failed to adequately rate the subprimemortgages that underpinned mortgage-bond deals.David

My first thought reading this is Chicago-style thug payback for suggesting the US might lose it's AAA status. Yes? No?

When I heard that BP was destroying a big portion of Earth, with no serious discussion of cutting their dividend, I had two thoughts: 1) I hate them, and 2) This would be an excellent time to buy their stock. And so I did. Although I should have waited a week.

People ask me how it feels to take the side of moral bankruptcy. Answer: Pretty good! Thanks for asking. How's it feel to be a disgruntled victim?

I have a theory that you should invest in the companies that you hate the most. The usual reason for hating a company is that the company is so powerful it can make you balance your wallet on your nose while you beg for their product. Oil companies such as BP don't actually make you beg for oil, but I think we all realize that they could. It's implied in the price of gas.

Scott AdamsI hate BP, but I admire them too, in the same way I respect the work ethic of serial killers. I remember the day I learned that BP was using a submarine…with a web cam…a mile under the sea…to feed live video of their disaster to the world. My mind screamed "STOP TRYING TO MAKE ME LOVE YOU! MUST…THINK…OF DEAD BIRDS TO MAINTAIN ANGER!" The geeky side of me has a bit of a crush on them, but I still hate them for turning Florida into a dip stick.

Apparently BP has its own navy, a small air force, and enough money to build floating cities on the sea, most of which are still upright. If there's oil on the moon, BP will be the first to send a hose into space and suck on the moon until it's the size of a grapefruit. As an investor, that's the side I want to be on, with BP, not the loser moon.

I'd like to see a movie in which James Bond tries to defeat BP, but in the end they run Bond through a machine that turns him into "junk shot" debris to seal a leaky well. I'm just saying you don't always have to root for Bond. Be flexible.

Perhaps you think it's absurd to invest in companies just because you hate them. But let's compare my method to all of the other ways you could decide where to invest.

Technical AnalysisTechnical analysis involves studying graphs of stock movement over time as a way to predict future moves. It's a widely used method on Wall Street, and it has exactly the same scientific validity as pretending you are a witch and forecasting market moves from chicken droppings.

Investing in Well-Managed CompaniesWhen companies make money, we assume they are well-managed. That perception is reinforced by the CEOs of those companies who are happy to tell you all the clever things they did to make it happen. The problem with relying on this source of information is that CEOs are highly skilled in a special form of lying called leadership. Leadership involves convincing employees and investors that the CEO has something called a vision, a type of optimistic hallucination that can come true only in an environment in which the CEO is massively overcompensated and the employees have learned to be less selfish.

Track RecordPerhaps you can safely invest in companies that have a long track record of being profitable. That sounds safe and reasonable, right? The problem is that every investment expert knows two truths about investing: 1) Past performance is no indication of future performance. 2) You need to consider a company's track record.

Right, yes, those are opposites. And it's pretty much all that anyone knows about investing. An investment professional can argue for any sort of investment decision by selectively ignoring either point 1 or 2. And for that you will pay the investment professional 1% to 2% of your portfolio value annually, no matter the performance.

Invest in Companies You LoveInstead of investing in companies you hate, as I have suggested, perhaps you could invest in companies you love. I once hired professional money managers at Wells Fargo to do essentially that for me. As part of their service they promised to listen to the dopey-happy hallucinations of professional liars (CEOs) and be gullible on my behalf. The pros at Wells Fargo bought for my portfolio Enron, WorldCom, and a number of other much-loved companies that soon went out of business. For that, I hate Wells Fargo. But I sure wish I had bought stock in Wells Fargo at the time I hated them the most, because Wells Fargo itself performed great. See how this works?

Do Your Own ResearchI didn't let Wells Fargo manage my entire portfolio, thanks to my native distrust of all humanity. For the other half of my portfolio I did my own research. (Imagine a field of red flags, all wildly waving. I didn't notice them.) My favorite investment was in a company I absolutely loved. I loved their business model. I loved their mission. I loved how they planned to make our daily lives easier. They were simply adorable as they struggled to change an entrenched industry. Their leaders reported that the company had finally turned cash positive in one key area, thus validating their business model, and proving that the future was rosy. I doubled down. The company was Webvan, may it rest in peace.

(This would be a good time to remind you not to make investment decisions based on the wisdom of cartoonists.)

But What About Warren Buffett?The argument goes that if Warren Buffett can buy quality companies at reasonable prices, hold them for the long term and become a billionaire, then so can you. Do you know who would be the first person to tell you that you aren't smart enough or well-informed enough to pull that off? His name is Warren Buffett. OK, he's probably too nice to say that, but I'm pretty sure he's thinking it. However, he might tell you that he makes his money by knowing things that other people don't know, and buying things that other people can't buy, such as entire companies.

People Love Berkshire Hathaway And That Has Done GreatI'm not saying that the companies you love are automatically bad investments. I'm saying that investing in companies you love is riskier than investing in companies you hate.

Second, take a look at Berkshire Hathaway's holdings. It's a rogue's gallery of junk food purveyors, banks, insurance companies and yes, Goldman Sachs and Moody's. The second largest holding of Berkshire Hathaway is…wait for it…Wells Fargo.

(Disclosure: I own stock in Berkshire Hathaway for the very reasons I'm describing. And my first job out of college was at Crocker National Bank, later swallowed by Wells Fargo.)

Let's talk about morality. Can you justify owning stock in companies that are treating the Earth like a prison pillow with a crayon face? Of course you can, but it takes some mental gymnastics. I'm here to help.

If you buy stock in a despicable company, it means some of the previous owners of that company sold it to you. If the stock then rises more than the market average, you successfully screwed the previous owners of the hated company. That's exactly like justice, only better because you made a profit. Then you can sell your stocks for a gain and donate all of your earnings to good causes, such as education for your own kids.

Having absorbed all of the wisdom I have presented here so far, you are naturally wondering if I have any additional investment tips. Yes, and I will put my tips in the form of a true story. Recently I bought something called an iPhone. It drops calls so often that I no longer use it for audio conversations. It's too frustrating. And unlike my old BlackBerry days, I don't send e-mail on the iPhone because the on-screen keyboard is, as far as I can tell, an elaborate practical joke. I am, however, willing to respond to incoming text messages a long as they are in the form of yes-no questions and my answer are in the affirmative. In those cases I can simply type "k," the shorthand for OK, and I have trained my friends and family to accept L, J, O, or comma as meaning the same thing.

The other day I was in the Apple Store, asking how to repair a defective Apple laptop, and decided, irrationally, that I needed to have Apple's new iPad. The smiling Apple employee said she would be willing to put me on a list so I could wait an indefinite amount of time to maybe someday have one. I instinctively put my wallet on my nose and started barking like a seal, thinking it might reduce the wait time, but they're so used to seeing that maneuver that it didn't help.

My point is that I hate Apple. I hate that I irrationally crave their products, I hate their emotional control over my entire family, I hate the time I waste trying to make iTunes work, I hate how they manipulate my desires, I hate their closed systems, I hate Steve Jobs's black turtlenecks, and I hate that they call their store employees Geniuses which, as far as I can tell, is actually true. My point is that I wish I had bought stock in Apple five years ago when I first started hating them. But I hate them more every day, which is a positive sign for investing, so I'll probably buy some shares.

Doubts are mounting about the health of China's property market, Beijing's ability to control inflation and the true extent of government debt. Last week, the central government disclosed that local governments owed debts equal to a quarter of gross domestic product. It's hard to imagine a large chunk of those borrowings won't turn sour.

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Agence-France PresseLunch at a Chinese construction site.

All that means bets against China are attracting new attention.

Popular places to profit from a negative bet on China have gotten crowded. In recent months, some hedge funds have earned big money after borrowing shares of U.S.-listed Chinese companies, many with auditing or governance problems, in order to profit from their subsequent fall.

Several say the easy money has been made. More to the point, these stock bets aren't really a play on China's broader economic health but rather on specific company woes.

Some investors are shorting exchange-traded funds that invest in China's heavily restricted yuan-denominated "A-share" markets in Shanghai and Shenzhen—that is, selling borrowed securities to profit from their fall. But the underlying A shares are battered, with the main index off nearly 20% its post-financial crisis highs of August 2009. Hong Kong-listed Chinese shares are more accessible for shorts, some of whom have taken negative positions on the Hang Seng Index or individual stocks, but the market there for Chinese shares is also pretty beaten down.

Short Plays

Examples of how an investor can bet on a major China slowdown through currencies. If the option expires without hitting the strike price, the total investment is lost. However, investors can also sell the options before they expire. When the currency moves in the direction of the bet, the option generally rises in value.

"One-touch" options pay off a specified amount once the currency pair reaches a certain level. "European-style" options allow the investor to exchange currencies at a specified rate on a predetermined future date.

Australian Dollar One Touch Investor buys a one-touch option that pays US$1,000,000 if the Australian dollar falls to 70 U.S. cents any time within two years from its current level of around $1.07. The option now costs about US$120,000. If the strike price is hit, the investor makes a return of about 730%.

Australian Dollar European-Style Option Investor buys a European-style option to sell the Australian dollar at 70 U.S. cents when the option expires in two years. An option that allows the investor to sell US$10 million of Australian dollars at 70 U.S. cents now costs about US$160,000. The more the Aussie dollar falls below 70 cents by the expiry date, the greater the return.

Canadian Dollar European-Style Option Investor buys a European-style option to buy the U.S. dollar at 1.30 Canadian dollars in two years, compared to its current level of 86 Canadian cents. It now costs about US$80,000 to buy an option for US$10 million of Canadian dollars at C$1.30 cents. The more the U.S. dollar rises above C$1.30 by the expiry date, the greater the return.

Yuan Non-Deliverable European-Style Option Investor buys a "European-style" option to buy the U.S. dollar at 8 yuan in two years, compared to its current level of 6.46 yuan. An option that allows the investor to buy US$10 million of yuan at 8 yuan now costs about US$50,000. The more the U.S. dollar rises above 8 yuan by the expiry date, the greater the return. With non-deliverable yuan trades, no yuan actually changes hands.

Source: WSJ Research

However, there are other ways to profit from a China implosion. While stocks have sagged, currencies and commodities subject to the country's huge influence over global demand are still hovering at levels that suggest nothing is wrong.

The Australian dollar has soared 75% against the U.S. dollar from lows set during the global financial crisis, in large part because of Chinese demand for the country's iron ore, coal, gas and other resources. It remains surprisingly close to its all-time highs, even as commodity prices have fallen back.

The Canadian dollar could be another, less obvious way to play a Chinese slowdown, particularly for those feeling gloomy about the U.S. and Europe and therefore expect weak demand for Chinese exports.

Like Australia, Canada would suffer from a drop in Chinese consumption of its oil, gas and minerals. If China sees both exports and imports fall off, it will have less money to buy Canadian government debt, too. That could depress the Canadian dollar, which still trades about 27% above its financial-crisis lows against the U.S. dollar.

A bet against the Canadian dollar is a bit cheaper than one against its Australian counterpart, in part because Canadian interest rates aren't as high, a main cost factor in pricing currency bets such as swaps and options.

Then there's copper. China is the No. 1 consumer of the red metal, which is used for pipes and wires in buildings. That makes it a proxy play on Chinese real-estate. On Friday, three-month copper prices fell as low as $9,345 a metric ton in London, down from $9,429 a ton Thursday, after the release of a soft Chinese purchasing managers index.

But prices remain more than double their levels from late 2008. And the last time China's Purchasing Managers Index was at current sluggish levels of around 50, copper was closer to $7,000 a ton, notes Patrick Perret-Green, a Singapore-based strategist for Citigroup.

Bets that rely on a China slowdown rippling through the corporate world are another avenue. Hugh Hendry, who runs Eclectica Asset Management in London, has taken an unusual short-China position by buying up credit-default swaps on Japanese companies he believes would suffer from a slowdown in exports to China, now Japan's biggest trading partner.

Perhaps the longest shot is betting on a fall in China's currency. That play has recently picked up some fans willing to defy the conventional wisdom that the yuan can only go up against the dollar. Bankers say hedge funds are buying cheap positions that will score huge profits if the yuan suddenly falls. But China's currency isn't freely convertible, and Beijing retains a lot of scope— $3 trillion in currency reserves, or the equivalent of 51% of GDP—to manipulate the exchange rate if it needs to. It's easy to envision a scenario where China's economy suffers while the currency doesn't budge. As one banker put it, these bets are cheap to make for a reason.

China shorts have been on a roll for over a year now. Hedge-fund manager James Chanos took a public beating early last year for challenging China's economic fundamentals, and asserting that it was in the midst of a "credit-driven property bubble." There's a lot more people agreeing with him these days.

They may not all be right. The negative China buzz could turn out to be a passing phase, and the chance to make money as a short has passed.

Indeed, some analysts argue that Chinese stocks are so beaten down that it's time for a rally. Royal Bank of Scotland predicts the MSCI-China index could jump as much as 80% through 2012 as Beijing shifts toward growth policies ahead of a change in China's leadership next year.

China proved naysayers wrong many times in the past. Even if things turn bad, it may take longer to happen than some might think. An investor who's right at the wrong time could lose a lot of money waiting to be vindicated.

Like long-term China bulls, the shorts may need to acquire a knack for patience.

About a year ago ? the Euro had its first bad spell due to the Greek situation.

During that time, exactly what happened in the markets? I am guessing that there was a flight to safety for the dollar and attendant downward pressure on interest rates. What happened to gold, silver, US markets?

No. The debt is what is killing us. We have the money to pay our creditors (thus far) and still send out the social security checks (so far). What's going to kill us is the loss of faith in our ability to deal with the debt.

Great question CCP. Revenues are something like 2.5 trillion. That is the start of what you have to work with if you don't raise the debt limit. Spending was supposed to be something like $3.8 trillion. In theory we would go ahead with 'essential services' governing and sending out 'checks' up to the 2.5 trillion limit which is more than a trillion of instant cuts. If Dems would agree to that they could more easily agree to just half that and still get their debt limit raised. In reality, Dems like the current governor in MN end all the things first that hurt the most to turn up the heat on his opponents because the issue to him is all political, not economic.

If we are 40% unfunded, then without tax increases or borrowing we in theory would layoff very roughly 40% of federal government workers. Those people could instantly become successful entrepreneurs... more likely they start looking like the state workers and teachers that were hanging around the state capital in Madison during the recent unrest. Also they would flood and overload local aid offices if instantly unfunded by the feds.

No, a trillion dollar 'layoff' with no phase in and no simultaneous adoption of pro-growth private sector policies I think is a prescription for chaos and unrest. I called it earlier all root canal and no pain killer. Like the frog in the water on the stove top, We need to apply the heat gradually IMHO.

Equities had a bad day on Friday, part of which was caused by a pretty dismal GDPreport &ndash; with a large downward revision to first quarter real growth.Apparently, the economy grew at an anemic 0.4% annual rate, not 1.9%.We didn&rsquo;t like it either, until we realized that most of this revision was dueto fewer inventories, which, if anything, creates more room for future growth. Notall revisions were negative. Real growth in 2010 was revised up to 3.1% from a priorestimate of 2.8% and pre-tax corporate profits are now estimated to be 9% higherthan originally thought. After-tax profits were revised up 15%.

It turns out, at least until the next big revisions, that the recession (in 2008)was worse and the earliest stages of the recovery in 2009 were slower. This helpsexplain, for now, why the unemployment rate went so high, so fast. It also makes therecession look more like a panic, which we believe it was.

The most consistent theme of Friday&rsquo;s revisions had to do with the mix ofnominal GDP, the combination of real GDP and inflation. The report showed that realGDP has been lower &ndash; due to the recession and early recovery &ndash; whileinflation has been higher. Nominal GDP changed little.

This must be quite jarring to the Keynesian mindset, both on monetary policy andfiscal policy. The Federal Reserve embarked on a second round of quantitative easingvery late in 2010 and yet real growth slowed. Meanwhile, the payroll tax rate wascut by two percentage points this year and growth nearly petered out. If loose moneyand big budget deficits don&rsquo;t boost real growth the Keynesian bag of tricks ispretty empty.

More importantly, with the recession so deep and today&rsquo;s growth so slow, theKeynesian model says inflation can&rsquo;t exist. But it does, even though thejobless rate is 9.2%, manufacturing capacity utilization is still below 80% and theeconomy is operating far below its potential.

It&rsquo;s much easier to explain the rise in inflation with our model. The Fed hasbeen holding short-term interest rates near zero, which is well below the trend innominal GDP growth. Nominal GDP has grown 3.7% in the past year and at a 4.1% annualrate in the past two years. Continuing ultra-low interest rates in the face of muchfaster nominal GDP growth is going to keep inflation rising even if the economyremains weak, which we do not believe will happen.

It&rsquo;s not that we don&rsquo;t care about the GDP report; it&rsquo;s that it isold news. The second half of the year still looks very bright. The Fed is easy,there is some spending restraint on the way, auto production and home building areat an inflection point, and corporate America is in a great position to invest.

This information contains forward-looking statements about various economic trendsand strategies. You are cautioned that such forward-looking statements are subjectto significant business, economic and competitive uncertainties and actual resultscould be materially different. There are no guarantees associated with any forecastand the opinions stated here are subject to change at any time and are the opinionof the individual strategist. Data comes from the following sources: Census Bureau,Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board,and Haver Analytics. Data is taken from sources generally believed to be reliablebut no guarantee is given to its accuracy.

"what are investors going to wait for before they start placing bets again?"

Across the board, pro-growth economic policies, which means yes, 'Obama's defeat' with a mandate to do something positive, also giving Harry Reid a new 'minority leader' title, repealing Obama care, a lightening of quadruple taxation on businesses, a stable dollar policy, a regulatory environment conducive to manufacturing, hiring and building, an energy policy committed to power us with what we know up until we invent a cleaner, safer, cheaper form of sufficient energy, and a public sector scaled back (really) to a size that can be pulled by our private economic engine. Removing the cloud of certainty/uncertainty that something worse from the government is coming at you just down the pike.

If we survived this, I think any serious movement on ALL of those fronts would trigger an economic re-birth.

Second quarter revenues increased 16% year-over-year and 31% sequentially, reaching $17.3 million Gross margin reached 77.9% on a GAAP basis and 80.0% on a non-GAAP basis Net income was $4.8 million on a GAAP basis, 28% of revenuesNet income was $9.4 million on a non-GAAP basis, 54% of revenuesOperating cash flow of $9.2 million End of quarter net cash was $121.0 million

Second Quarter 2011 Results:

Total revenues in the second quarter of 2011 were $17.3 million, an increase of 16% compared to $14.9 million in the second quarter of 2010, and an increase of 31% compared to $13.2 million in the first quarter of 2011.

Net income, on a GAAP basis, for the second quarter of 2011 was $4.8 million, or $0.17 per share (diluted), compared to net income of $2.2 million, or $0.09 per share (diluted), in the second quarter of 2010, and net income of $1.5 million, or $0.05 per share (diluted), in the first quarter of 2011.

Net income, on a non-GAAP basis, for the second quarter of 2011 was $9.4 million, or $0.33 per share (diluted), compared to non-GAAP net income of $7.1 million, or $0.26 per share (diluted), in the second quarter of 2010, and non-GAAP net income of $5.4 million, or $0.19 per share (diluted), in the first quarter of 2011.

Cash, cash equivalents and marketable securities as of June 30, 2011, totaled $121.0 million, compared to $108.5 million as of March 31, 2011. Cash generated from operations during the second quarter was $9.2 million, cash used in investing activities was $0.1 million and cash provided by financing activities (resulting from the exercise of options) was $3.4 million.

First Six Months 2011 Results

Total revenues for the six months ended June 30, 2011 were $30.5 million, a year-over-year increase of 7% compared to $28.5 million for the six months ended June 30, 2010. Net income on a GAAP basis for the six months ended June 30, 2011 was $6.2 million, or $0.22 per share (diluted), compared to net income of $5.1 million, or $0.20 per share (diluted), for the six months ended June 30, 2010. Net income on a non-GAAP basis for the six months ended June 30, 2011 was $14.8 million or $0.52 per share (diluted), compared with non-GAAP net income of $13.1 million, or $0.50 per share (diluted), for the six months ended June 30, 2010.

Eli Fruchter, CEO of EZchip commented, "The second quarter of 2011 continues our growth trend and was another record quarter for EZchip in all our financial parameters, including achieving an outstanding 54% non-GAAP net income margin. NP-4 is making good progress and we are very comfortable it will move to production during the fourth quarter.

"According to the Carrier Ethernet Equipment Analysis report recently published by Infonetics, Service Providers investment in Carrier Ethernet continues to outpace overall telecom capex, with CESR and Transport, EZchip's target markets, expected to grow to over 70% of the total Carrier Ethernet Equipment market by 2015. The result for us is that the market for our high speed NPUs is growing much faster than previously anticipated in its prior report.

"During the second quarter we also continued to make good progress with our other products that are under development, including the NP-5 and the new product in Kiryat Gat that are expected to become our growth generators when the NP-4 reaches peak revenues in several years."

Conference Call

The Company will be hosting a conference call later today, August 3, 2011, at 10:00am ET, 7:00am PT, 3:00pm UK time and 5:00pm Israel time. On the call, management will review and discuss the results, and will be available to answer investor questions.

To participate through the live webcast, please access the investor relations section of the Company's web site at: http://www.ezchip.com/investor_relations.htm, at least 10 minutes before the conference call commences. If you intend to ask a question on the call, please contact the investor relations team for the telephone dial in numbers.

For those unable to listen to the live call, a replay of the call will be available the day after the call under the 'Investor Relations' section of the website.

Use of Non-GAAP Financial Information

In addition to disclosing financial results calculated in accordance with United States generally accepted accounting principles (GAAP), this release of operating results also contains non-GAAP financial measures, which EZchip believes are the principal indicators of the operating and financial performance of its business. The non-GAAP financial measures exclude the effects of stock-based compensation expenses recorded in accordance with FASB ASC 718, amortization of intangible assets and taxes benefit (taxes on income). Management believes the non-GAAP financial measures provided are useful to investors' understanding and assessment of the Company's on-going core operations and prospects for the future, as the charges eliminated are not part of the day-to-day business or reflective of the core operational activities of the Company. Management uses these non-GAAP financial measures as a basis for strategic decisions, forecasting future results and evaluating the Company's current performance. However, such measures should not be considered in isolation or as substitutes for results prepared in accordance with GAAP. Reconciliation of the non-GAAP measures to the most comparable GAAP measures are provided in the schedules attached to this release.

About EZchip

EZchip is a fabless semiconductor company that provides Ethernet network processors for networking equipment. EZchip provides its customers with solutions that scale from 1-Gigabit to 200-Gigabits per second with a common architecture and software across all products. EZchip's network processors provide the flexibility and integration that enable triple-play data, voice and video services in systems that make up the new Carrier Ethernet networks. Flexibility and integration make EZchip's solutions ideal for building systems for a wide range of applications in telecom networks, enterprise backbones and data centers. For more information on our company, visit the web site at http://www.ezchip.com.

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are statements that are not historical facts and may include financial projections and estimates and their underlying assumptions, statements regarding plans, objectives and expectations with respect to future operations, products and services, and statements regarding future performance. These statements are only predictions based on EZchip's current expectations and projections about future events. There are important factors that could cause EZchip's actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. Those factors include, but are not limited to, the impact of general economic conditions, competitive products, product demand and market acceptance risks, customer order cancellations, reliance on key strategic alliances, fluctuations in operating results, delays in development of highly-complex products and other factors indicated in EZchip's filings with the Securities and Exchange Commission (SEC). For more details, refer to EZchip's SEC filings and the amendments thereto, including its Annual Report on Form 20-F filed on March 31, 2011 and its Current Reports on Form 6-K. EZchip undertakes no obligation to update forward-looking statements to reflect subsequent occurring events or circumstances, or to changes in our expectations, except as may be required by law.